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Investment Overview for Netflix (NASDAQ:NFLX)

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Below are key drivers of Netflix's value that present opportunities for upside or downside to the current Trefis price estimate for Netflix:

Netflix's U.S. Streaming Subscribers: Currently we forecast Netflix's U.S. streaming subscriber base to increase from around 39.0 million in 2014 to more than 61.0 million by end of our forecast period. There could be more than 10% downside to our price estimate if this figure remains below 50 million instead. This could happen if the market growth for streaming slows down and competition weighs heavy in the future. On the other hand there could be around 10% upside to our price estimate if Netflix blows past expectations and captures around 70 million U.S. subscribers.

Domestic Streaming Contribution Margin: Currently we forecast this figure to rise from about 30.0% in 2014 to close to 41% by the end of our forecast period. However there could be a downside of about 10% to the our price estimate if the figure was to reach only 35%. On the other hand, there could be upside of about 5% if this figure was to increase to 45% instead.

For additional details, select a driver above or select a division from the interactive Trefis split for Netflix at the top of the page.

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Netflix offers video rental service in the form of DVDs as well as online streaming to U.S. customers. The company also offers streaming services in international markets and is currently available in about 50 countries. Netflix plans to expand into 200 countries by the end of 2016.

Netflix's content is available for streaming through variety of devices such as PCs, Macs, video game consoles, tablets and smartphones. The company is consistently working towards striking more content deals in order to improve its online library.

In the case of DVDs, Netflix's customers can choose the videos they want to rent from an online library available on the company's website. Unlike traditional video rental businesses such as Blockbuster and Redbox, Netflix does not have any store locations and instead delivers DVDs through postal mail.

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The majority of Netflix's value is currently hinged on its U.S. Streaming services for the following reasons.

Firstly, the DVD subscribers are expected to decline significantly in the U.S. while streaming subscribers are expected to grow. The home video market is growing in the U.S. and streaming is the best way to tap it given the proliferation of multiple internet-enabled devices. Netflix has seen rapid adoption of its streaming plans in the U.S. Although the competition is intensifying, Netflix remains a leader in the streaming segment.

Secondly, the international streaming business is currently a relatively lower value contributor but this is expected to change in the future as the US streaming market becomes saturated. Netflix has expanded into around 50 countries the progress has been so strong that the company now believes it can complete its global expansion over the next two years while managing to still be profitable.

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Online Streaming

There is very clear shift of video consumption to the Internet, and Netflix is one of the companies leading this change. The company's DVD subscribers are declining and future growth will come from streaming subscribers. Eventually the company would like to replace all of its physical DVDs with online library.

International Expansion

Netflix entered Canada towards the end of 2010 with its streaming-only service. In 2011, it witnessed good adoption in Canada and consequently expanded to Latin America. In early 2012, Netflix launched its streaming service in the U.K. and Ireland. Following that success, the company also expanded to Nordic countries of Norway, Sweden, Denmark and Finland. Netflix expanded its service to The Netherlands by late 2013 and launched in Germany, Austria, Switzerland, France, Belgium and Luxembourg by late 2014. The company launched into Australia and New Zealand in March 2015 and will launch into Japan, Spain, Italy and Portugal by fall 2015. it is also exploring options of entry into lucrative markets such as China and India. Currently, Netflix has subscribers in around 50 countries. While the international market presents a huge potential, it also presents obstacles such as low broadband penetration and speeds, local competition and content licensing complications.

Increasing Competition in Online Streaming

Netflix has been facing increasing competition in online streaming. Along with Amazon and Hulu, Blockbuster and Comcast have also entered this space. HBO plans to launch a stand-alone subscription service in 2015 and is expected to be a significant competitor to Netflix in the future. Dish and Sony are launching their own internet MVPD (multichannel video programming distributor) services. The growing competition can not only put pressure on Netflix's subscriber growth, but also increase content costs due to bidding by competitors.

Growing Focus On Improving Content and increasing Original Content

Netflix’s original content has improved perception of the overall brand. The company’s original programming has garnered critical acclaim by scoring multiple Emmy, Golden Globe and Academy Award nominations and several wins in the last two years. Shows such as House of Cards and Orange Is The New Black are drawing lot of audience and attracting customers to sign up. Netflix has effectively marketed these exclusive shows to maintain its subscriber momentum.

Besides some of the exclusive shows that we mentioned before, Netflix also signed a deal with Disney (NYSE:DIS) in 2012, to gain access to its content. During 2013, Netflix continued to expand its streaming content through deals with Turner Broadcasting, Warner Brothers Television Group, DreamWorks Animation and Hasbro Studios.

In November 2013, Netflix and Marvel Television (a subsidiary of The Walt Disney Company) announced a five-season deal to produce live action series focused on four Marvel superheroes. These series will be part of a roster of 30+ upcoming original series that Netflix plans to broadcast in 2015 and 2016.

Trefis Forecast Rationale for Streaming Video Cost per GB

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${forecast} refers to the average amount it costs Netflix to stream 1 GB of data (in the form of video) over its streaming service.

This is paid primarily to Content Delivery Networks (or CDNs) like Akamai that provide the bandwidth needed to Netflix. CDNs, in turn, purchase this bandwidth from operators and infrastructure providers that own the bandwidth on the internet.

This figure is negotiated between the bandwidth provider and the end user on a one to one basis and hence is not reported. We estimate this using guidance from a number of industry experts who track this on a periodic basis.

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${forecast} has come down significantly for Netflix as a result of competition between CDN providers and increased demand for Netflix's data that allows it some negotiation power.

We expect the cost to stay reasonably stable at around the present mark with a slight downward bias.

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We considered the following factors for this forecast:

Competition in the bandwidth provider market is likely to increase

Till recently, Akamai was a virtual monopoly in the bandwidth provider space, with Limelight providing some sort of competition

However, in recent years, low cost competitors like Internap have started gaining more market share

This is likely to put a pricing pressure on bandwidth prices

Technical advancements have led to bandwidth costs coming down

Technical infrastructure has improved considerably in the last few years and consequently costs for bandwidth providers have come down

How Does Trefis Modelling Work?

How do we get the historical numbers for this chart?

Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.

Who came up with the Trefis forecast for future years?

The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.

How does my dragging the trendline on the chart impact the stock price?

We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.

We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.

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